In this article, you will uncover the most effective George Soros trading strategies that have made him the world’s most famous forex trader.
The most successful trades of George Soros involved shorting currencies of distressed countries.
For those of you who are new to the trading world, to go “short” means you are betting that the value of the asset will decline.
Now let’s dive into the three trading case studies.
1. Soros breaks the Bank of England and earns $1 billion in one day
September 16, 1992, went down in history as the “Black Wednesday”.
George Soros and other big traders found a weak spot in the British monetary policy and exploited it so hard that the devaluation of the sterling (currency nickname for the British pound) was unsustainable.
The selling pressure was so high that the British government had to take their currency out of the European Exchange Rate Mechanism (ERM).
To understand George’s strategy, you must know the economic context of the time.
Even though Britain was in a recession in 1990, the pound joined the ERM that year. It fixed the pound’s rate to the Deutsche mark in order to make the investments between Britain and Europe more predictable and stable.
But as the political and financial situation in Germany changed during its unification, many ERM currencies were under big pressure to keep their currencies within the agreed limits.
Britain had the most problems – its inflation rate was very high and the USD rate was also falling. The decreasing USD rate was bad because many British exporters were being paid in USD.
As it became clear that the pound was not able to artificially withstand the natural market forces, more and more speculators began circling around and making plans on how to profit from this situation.
Big forex traders waited until the financial situation got as bad as it could naturally get, and then created extra pressure on the pound by selling it in huge amounts.
The most aggressive of them was George Soros who made a short trade every 5 minutes, profiting each time as the British pound fell by the minute.
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“The money that I made on this particular transaction would be estimated at about $1 Billion dollars. We very simply used the forward market – you borrow sterling and you sell the sterling that you’ve borrowed. And then you buy back the sterling when the loan expires.”
– G. Soros.
Let’s look at a simplified example to understand this trading strategy:
Soros borrows 1 million GBP, sells it at the current rate for 2 million USD (GBP/USD = 2.00) and buys it back when the GBP/USD = 1.50 for 1.5 million USD, thus keeping the difference of 0.5 million USD.
In order to sustain the fixed rate, the Bank of England was buying 2 billion GBP an hour, which was an unprecedented amount. The policies of the ERM demanded that the countries with the strongest currencies have to sell their currencies and buy the weakest to help maintain the equilibrium.
In this case, the Bank of Germany had to sell Deutsche marks and buy pounds.
However, they didn’t come to Britain’s rescue because apparently, Germany had an interest in seeing the GBP devalued. All of Britain’s efforts to pump in money and increase the already high interest rates proved futile.
In the late afternoon of September 16, as the traders understood that the Bank of England had insufficient amounts of foreign currencies to buy in all the pounds that were sold, they pushed even more which resulted in a collapse.
At 19:40, the British prime minister confirmed defeat and declared that Britain is leaving the ERM.
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What indicators does George Soros use?
George Soros’s trading strategies were primarily based on fundamental analysis. Like most of the world’s top traders, George used fundamental analysis to determine the overall market direction in which to trade and technical analysis to time the exact entry and exit points of their trades.
As far as technical analysis and indicators go, George Soros’s approach was extremely simple.
Unlike most beginner traders, his charts were NOT littered with fancy indicators, which, by the way, often contradict each other.
The charts of bank and hedge fund traders look completely the opposite.
All that traders like George Soros want to know are the key critical levels. For Soros, it all came down to simple support and resistance. No clutter, nothing to mess with their trading decisions.
Do you want to know the secret to why big institutional-level traders don’t rely on indicators so much?
Because most indicators are based on lagging data and they were developed to try and predict which direction the market is heading. But just like big banks, Soros is the market!
George could make split-second decisions based on fundamental changes. And as he did that he put enormous amounts of money into the trades thus single-handedly pushing the market up or down. And believe me, when a trader like Soros enters a trade, all the pretty lines that you have drawn on the chart get crushed like nothing.
Understanding the fundamental and technical analysis of big players is an important step to becoming a successful trader. After all, you should be trading with the market. Not against it.
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2. George Soros earns $790 million, crashes the Thai baht, and triggers the Asian crisis
The second most notorious trade of Soros came in 1997 when he saw a possibility that the Thai baht could go down. So he went short on the baht (by going long on USD/THB) using forward contracts.
His actions were often considered a triggering factor, which resulted in the big Asian financial crisis that affected not only Thailand but also South Korea, Indonesia, Malaysia, the Philippines, Hong Kong, and others.
This is how it happened:
1. Soros goes short on the Thai baht.
2. Thailand spends almost $7 billion to protect the baht against speculations.
3. Soros sells all his baht resources and publicly warns people about its possible fall and ensuing crisis.
4. On July 2, Thailand is forced to give up the fixed rate of the baht and it starts to float freely. Thailand asks for help from the International Monetary Fund (IMF).
5. Thailand takes on hard austerity measures to secure the loan from the IMF.
6. Baht falls from 1 USD for 25 baht to 56 baht >> Soros gains more than $790 million!
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3. Soros gains $1.4 billion from the falling yen
Japan’s economy was seriously damaged after the devastating tsunami in 2011 and its economic recovery had been slow. Since then, traders have been waiting for the yen to weaken.
This started to happen at the end of 2012 when Shinzo Abe (then a candidate for the Prime Minister post) publicly spoke about his plans to weaken the yen in order to boost the economy.
Taking into consideration his high approval rating, this was a good signal for the investors to open big USD/JPY positions, betting that the value of the dollar would rise against the yen.
The first one to jump in was George Soros who is legendary for his skills of shorting different currencies with high leverages and worldwide consequences.
George forecasted the upcoming trend and his fund called “Soros Fund Management” allocated 10% of its $24 billion to USD/JPY in mid-November 2012.
Since then, they gained $1.2 – $1.4 billion in this deal, according to sources close to the Fund.
Other big players who opened similar positions include Daniel Loeb, David Einhorn, Caxton Associates, Tudor Investments, and Moore Capital.
These huge bets helped increased the momentum of the yen’s slide. This was not only beneficial for the traders who shorted the yen, but also for Shinzo Abe who knew that a weaker yen could make Japan’s export more competitive.
This, in turn, was heavily criticized by EU countries who understood that such intervention would lower their export potential because Japanese production would cost less and less.
Banks and hedge funds soon started telling their clients to go on this bet as well.
The dollar increased, even more, when Shinzo Abe was elected as the Prime Minister on December 26, 2012.
After Shinzo’s election, even the Bank of America jumped in to take advantage of this trend.
Luckily for Japan, these moves of Soros and other traders didn’t threaten its currency as they did when Soros went short on GPB in 1992 and on Thai baht in 1997. The reason for this is that Japanese businesses own the biggest part of Japan’s resources and debts.
How much did George Soros make in forex?
George Soros has made $3.19 Billion in just three of his most notorious forex trades:
- $1 Billion by shorting the British pound in 1992.
- $790 Million by betting against the Thai baht in 1997.
- $1.4 Billion by shorting the Japanese yen in 2012.
It’s important to note that George also traded other assets besides forex. For example, he shorted the stocks of Deutsche Bank right before the Brexit referendum in 2020. It’s estimated that his fund has made more than $100 million as the Deutsche Bank stock plunged after the referendum.